Mastering all multi-manager skills

John Kelly, head of client investment, explains how building investment portfolios in Abbey\'s multi-manager range around clients\' risk profiles helps maintain gentle outperformance.

In a multi-manager market increasingly polarised between the fund of funds and manager of managers approaches, Abbey’s multi-manager range has a foot in each camp. While it espouses a manager of managers approach to running its portfolios, it is, for technical reasons to do with concentration, structured as a fund of funds, investing in its own dedicated subfunds.

Head of client investment John Kelly, who is in charge of the fund range, says the funds are based on a benchmark of the customer’s risk profile, rather than referring to a peer group. “We look at the efficient frontier to find the points that resonate with customers’ needs and where you can make sensible decisions,” he says.

There are five options available to investors – an all-equity and an all-bond fund, and three managed options – an 80/20 bond/equity split (the Cautious fund), a 55/45 equity/bond split (the Balanced fund) and a 75/25 equity/bond split (the Growth fund). “These are the three waymarks between all equities and all bonds and they reflect the broad needs of most of the population,” says Kelly. “Other needs can be met with a blend of the other two funds.”

These proportions are fixed, and this rigid approach to asset allocation is fundamental to the range, according to Kelly. “Our advisers or independent intermediaries will spend a couple of hours with each client determining their risk profile and putting them in the best fund to suit that,” he explains. “If we changed the asset allocation in the fund we would have to go back and move the client. We promise our funds will do what they say on the tin and we can’t then change that. That is the big difference from funds of funds. Your needs change slowly, so how can they be supported by a fund that changes every quarter? It is the person who knows the client – the IFA or Abbey adviser – who should make any changes, not the fund manager. Our funds are a bit like buses. They always go the same way and, if you want to go somewhere different, you get a different bus.”

The Abbey Multi-Manager Cautious fund sits in the Investment Management Association’s Cautious Managed sector, in which it is currently 15th of 19 funds of funds over one year. Under IMA rules Cautious Managed funds can invest up to 60% in equities, so the Abbey fund’s 20% exposure is on the low side, which can skew its position versus the peer group according to which asset class is performing better. Kelly describes the fund as being designed for “those people with an asymmetry of risk profile: they are more inclined to retain money than to risk it on growth, but they still want to take a bit of risk for the chance of better returns”.

The Abbey Multi-Manager subfunds break down into six bond and various equity funds. All the multi-manager funds invest in these subfunds; only the proportions differ.

On the bond side, assets are managed by Pimco, Western, Barclays Global Investors and Merrill Lynch. Kelly says they have four very distinct styles and have been stable as a team since the launch of the products 18 months ago. “They have brought gentle outperformance and consistency and a bit of innovation,” he adds, explaining that in a bond market where outperformance is hard to achieve, it is fund managers who can be “elastic” with their risk budget, looking overseas or to the use of derivatives, that can add value.

The 20% of the Cautious fund’s assets held in equities are split roughly in half between domestic and international equities, with the international portion further divided, again about equally, between the Far East (including Japan), Europe and America. In the Far East and Japan Schroders and RCM manage assets for the funds; in the UK Abbey uses JP Morgan, State Street and BGI; in Europe it has Axa, Oechsle and State Street; and for America, Goldman Sachs and Deutsche. “This is the American division of Deutsche – not DWS, which is being sold to Aberdeen,” says Kelly. “It is a completely different business and not at all related to the processes in the UK.”

Because the asset allocation is fixed at the outset, portfolio changes are rare in the Abbey funds. Earlier this year Alliance Bernstein was moved off the American equity portfolio in favour of Goldman Sachs, but Kelly says there has been “nothing more radical than that”. Small changes are made as cash comes in, to maintain the shape of the portfolios by topping up any holdings that may have been slipping back in performance terms, but as Kelly says, “transactions are expensive. You can be a hero in bond markets with performance of index plus 0.5%, so blowing 0.5% on trading is madness. It can cost you that to turn the portfolio from one shape to another. It is better to spend months in advance getting it right than to change later.”